The FaceTime setting can be found in Settings --> Phone. It's an On/Off toggle. Set it to ON if you plan to use FaceTime on the device.

Contacts in your contacts address book that have a FaceTime enabled device will show which # or email address can be used (Launch Contact, Select the Contact Name, Select FaceTime to show a list of phone numbers and email addresses. Those that can be used will have the FaceTime icon next to it).

On the iPod...

There is a FaceTime app. The first time you launch it, you will be asked to login with an Apple ID. That address will be FaceTime enabled. If you have that address on your iPhone you'll see that FaceTime icon (automagically).

And yes... it will be much easier to understand once you have the device in hand.

First you check if your FaceTime featured is enabled. Tap settings on your new iPhone, scroll down to the green icon called Phone and select it. Make sure it is turned on.

Second, when you call someone you will see an on screen FaceTime icon. You can tap it and if the recipient has an iPhone4 on Wi-Fi zone, he/she will get an invitation. If your call is accepted then after few seconds itll connect.